The TFSA has become an important player in the financial lives of Canadians but, while most of us have one, few of us are maximizing our TFSAs. I believe that is due, in part, to a lack of understanding of what an amazing investment vehicle the TFSA is.
Here is a short list of some of the TFSAs best features:
- Tax-free. Genuinely tax-free. As in zero tax ever. Not on the amount you contribute and not on the amount those contributions earn you whether it is interest, dividend or capital gains income. This cannot be said of any other investment account. This is important not just for increasing your returns and lowering your tax bill but also because in retirement, withdrawals from your TFSA will not increase your income and therefore will not trigger any claw back on OAS.
- Flexible. Everyone has the same contribution room (it is not tied to your income level the way RRSP contribution room is) and it accumulates without ever being lost. In addition, if you had built your TFSA balance up to $80,000 you could withdraw that full amount (tax-free of course) and then redeposit that full amount the next year even though the official contribution room is currently $57,500.
- Smart solution for many life stages. High income earners (income splitting through gifting contributions to family), young adults with lower income (greater flexibility than saving within an RRSP and save your RRSP contribution room for when you are in a higher tax bracket), and retirees (consider investing surplus RIF and LIF payments inside your TFSA) all benefit in different ways from using a TFSA. Having beneficiaries on your TFSA is also a great way to reduce probate as the balance of your account will go directly to your beneficiaries instead of through your estate upon death.
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